German powerhouse?

Tuesday, January 22, 2013

If combined Hapag-Lloyd, Hamburg Süd would be fourth largest container carrier.

By Chris Dupin

The two leading German liner carriers, Hapag-Lloyd and Hamburg Süd, said in December they’re discussing a possible merger that could create the fourth largest container shipping company in the world.
Combined, their fleet would have capacity of more than 1 million TEUs. Only Maersk, Mediterranean Shipping Co. and CMA CGM would be larger.
According to the information service Alphaliner on Jan. 8, Hapag-Lloyd was the sixth largest container shipping carrier with 139 owned and chartered ships with an aggregate 632,593 TEUs of capacity, or about 3.8 percent of the world’s fleet. It was about 50 percent larger than Hamburg Süd, the 12th largest container transporter with 104 ships of 425,411 TEUs of capacity, or 2.5 percent of the global fleet.
There has long been discussion about a possible combination of the two companies, in part because Hapag-Lloyd has a global presence, especially in the major East-West trades, while Hamburg Süd is strong in the North-South trades.
In addition, as both companies are based in Hamburg, merging the two would not face the cultural hurdles, like for example bringing together carriers from Europe and Asia.
However, combining even two German companies may not be entirely a simple matter. The 1970 merger of Hapag and Bremen-based North German Lloyd was not without its difficulties as jobs were eliminated and Bremen, which had its own strong shipping culture, saw positions relocated to Hamburg.
When Hapag-Lloyd and Hamburg Süd discussed a combination in 1997, Peter Shaerf was skeptical that it would be completed. He observed that despite their complementary route structures, each had very different corporate cultures.
“The only thing that is different this time around is that necessity is the mother of invention,” said Shaerf, who is now managing director of New York-based AMA Capital Partners and deputy chairman of the containership leasing company Seaspan. “I think they will attempt to overcome those cultural differences and strategic differences. The industry has changed in the last 10 years in that the alliances are much more powerful. Size matters and it is a good strategic fit.”
The fact that Hapag-Lloyd has fewer owners than it did in the past may help smooth the path to a merger.
The Albert Ballin consortium owns 78 percent of Hapag-Lloyd. It consists of the City of Hamburg (36.9 percent), Kühne Maritime (28.2 percent), Signal Iduna (5.3 percent), HSH Nordbank (2.9 percent), M.M. Warburg Bank (2.9 percent) and HanseMerkur (1.8 percent). Another 22 percent is owned by the tourism company TUI AG, which is publicly listed.
At a press conference in December, Michael Frenzel, chief executive officer of TUI, said “we welcome these talks because we are convinced a merger that has been discussed time and again…this could only be positive, the two companies are an ideal fit. There are major synergies at stake here. We are not talking about job losses; we are talking about infrastructure, duplication of IT, etc.”
Frenzel said TUI has the ability to sell its stake in Hapag-Lloyd at any time or demand an IPO. “If these talks continue, it will enhance the value of our investment,” he added.
Hamburg Süd is owned by the Oetker Group, a family company that has interests in the food, beverage, and banking industries.
A merger “would be a great move, a great message for shippers and all the vendors,” said Rudy Mack, whose tenure as president of Hapag-Lloyd America from 1999 to 2007 capped 35 years with the company. Talked about on and off for some 20 years, he said it “has always been a good combination.”
Mack, who today is a consultant, said the purchase of CP Ships in 2005 by Hapag-Lloyd’s then-parent company TUI AG and merger of the two shipping companies “was the second best solution—the best solution… was always Hamburg-Süd.”
A merger would allow them to offer service that was “even more global” and “the cost savings the two companies could achieve would also be beneficial for the survival of the two companies,” he said.
It’s not clear where the impetus for the latest discussions is coming from, though Klaus-Michael Kuehne, honorary chairman of forwarding giant Kuehne+Nagel, told Germany’s Wirtschaftswoche magazine last year he believed Hamburg Süd would be an ideal merger partner for Hapag-Lloyd.
“We think it would be a sound move,” said Simon Heaney, research manager at Drewry, adding the two firms are operationally complementary. “But gauging the likelihood of whether it is going to happen or not is very difficult,” he added.
The fact that both companies made public disclosures that they are holding discussions means “both parties are fairly serious about this, but you must remember this is not the first time they have flirted with each other and nothing happened in the past,” Heaney said.
“This time there must be more urge to merge than any time before, at least since April 1956 when the era of commercial maritime containerization started,” said DynaLiners in a special 14-page report, Hamburg Express, published in January by Dynamar B.V. in the Netherlands.
Heaney noted the 1997 talks broke down because the two firms were unable to come to an agreement about which firm would have ultimate control. He also said it is difficult to determine which company would most benefit from a merger given so little is known about the privately held Oetker Group.

Hamburg Pride. Given the stakes in Hapag-Lloyd held by both the Hamburg government and many of its leading businesses, a desire to see the city continue as a major shipping center may play a role in the talks.
Hamburg is the second largest container port in Europe, but is located 70 miles up the Elbe River from the North Sea. Unless the Elbe is deepened, it could be at a disadvantage compared with competitors such as Rotterdam which larger ships call.
A German court last October halted plans to deepen the Elbe by 2.4 meters to consider complaints from environmentalists.
An article on Der Spiegel’s Website noted that when the world’s largest containership, CMA CGM’s Marco Polo, visited Hamburg in December, the ship only planned to carry 4,000 containers, even though it had a capacity to handle 16,000 TEUs because otherwise it would have been unable to navigate the river.
As a major player in the East-West container trades, Hapag-Lloyd has suffered from the downturn in shipping rates with the rest of the container industry, Heaney said, but added “comparatively they have held up fairly well. They have been one of the better performers towards the top rank. They are by no means a basket case.”
While public financial information is not available for Hamburg Süd, Heaney said the company is likely to have benefited from its heavy involvement in the South American trade where economies are growing faster than in many parts of the world.
Indeed, DynaLiners said Hamburg Süd’s carryings have grown at a compound annual growth rate of 8 percent since 2000, compared to just 4 percent for Hapag-Lloyd.
Michael Webber, senior analyst with Wells Fargo Securities, noted merger and acquisition activity in the container liner sector “has been relatively limited recently, although carriers have consolidated some operations through alliances (most notably on Asia-Europe routes last year). While the announcement appears relatively preliminary in nature, we would view consolidation in general as a modest positive for the industry, largely due to the potential improvements in balance sheets and counterparty risk (which is already relatively low).
“However, we note that increased operating efficiencies could cut down (to a degree) the need for incremental third-party capacity (containerships and, to a lesser degree, boxes). We believe the situation warrants monitoring, and could get more of a focus in 2013, particularly as overcapacity and softer topline demand have kept valuations in check,” Webber said.
Geoff Giovanetti is managing director of the Wine and Spirits Shippers Association, which employs both carriers for its customers. (He also serves on American Shipper’s Editorial Board.) While Hapag-Lloyd is a leading transatlantic carrier and Hamburg Süd is a major player in the U.S.-South America and the U.S.-Australia/New Zealand trades, he said they also compete with each other in those lanes.
“They are sometimes on the same ship with each other—in many of those cases, now that I think about it,” he said.
DynaLiners said the two companies cooperate in eight vessel-sharing agreements and more than 10 slot-charter arrangements.
“Each company is an old-line German steamship line,” Giovanetti said. “All of the positive attributes that you would assign to Germans applies to personnel in both companies and methodology in each company. Each of them does a very good job.”
He feels that Hapag-Lloyd, because of its larger size, has become more “institutional,” while Hamburg Süd has a little more flexibility when dealing with shippers. For example, he said Hapag-Lloyd goes through a rigorous review of its inland tariff annually, if not more frequently, based on its costs and may be unwilling to adjust it. In contrast, Hamburg Süd may encourage shipments to a particular inland destination in order to avoid the expense of relocating containers, he said.
“I won’t say either approach necessarily makes more money than the other or is more customer-friendly,” he added.
“Any time two shipping companies join forces, it is not necessarily good for the shipping public, but from their standpoint, certainly the carriers need to do something to stop this hemorrhaging of money and increasing the rates is not the only solution. In fact that is one that is going to get stale very quickly with a lot of customers,” Giovanetti explained. “So the trend is toward mergers or acquisitions certainly being a lot more productive than bankruptcies. But for the shipping public, the more you constrain the supply of available partners, the less good it is as far as rates and service are concerned.”

Industry Trend? Could a Hapag-Lloyd/Hamburg Süd combination be the first in a string of mergers among shipping carriers?
The DynaLiners report noted since the Hapag-Lloyd acquisition of CP Ships and Maersk’s purchase of P&O Nedlloyd in 2005 there have been 30 smaller deals, but they “have not satisfied the frequent calls for further, real consolidation in the container shipping industry.”
A report on the container shipping industry released last year by Boston Consulting Group (BCG) said “Game-changing consolidation among the larger carriers seems unlikely, and some carriers are apt to continue receiving ‘rescue packages’ that will influence their competitive moves. Carriers that do not have access to the same level of external funding will be forced to sustain themselves.”
BCG said “few if any carriers have sufficient cash for an acquisition, and it would be challenging for both operational and organizational reasons for two carriers to integrate their business in the current environment.”
Interestingly, BCG added that “Although major consolidations are unlikely, a handful of smaller-scale mergers and acquisitions, joint ventures and alliances may occur during the next 12 months to increase market power, especially on smaller routes within Oceania and Latin America since the major trade lanes are already dominated by alliances.”
But would liner mergers really be a game-changer?
Mathijs Slangen, senior analyst at Seabury in Amsterdam, said “one of the biggest issues in our industry is the overcapacity of deployed TEUs. This is likely to continue for at least one or two years with many new vessels coming in. I do not see how a merger could solve this as the vessels will obviously still be there.
“I do not believe that carriers see the oversupply as a driver for consolidation,” he said. “We do notice that the larger carriers are focusing on scale economies a lot, possibly reasoning that other carriers will or cannot follow suit simply because of the size of these companies, their networks and or maybe even financial capability. I am not sure if the reasoning holds, but if it is the case it would make sense for smaller/medium-sized carriers to join forces.
On the other hand, these rumors about carriers possibly merging are not new to
the industry as they have always been there.”

Reefer Opportunity. One opportunity for Hamburg Süd going forward may be increasing its involvement in the refrigerated container trade.
Hamburg Süd launched a direct liner service between North, Central and South America at the start of January, deploying five vessels with a nominal slot capacity of 1,850 TEUs, including reefer plugs.
The Chiquita “in-house” shipping company Great White Fleet now lists the five Hamburg Süd ships as the vessels moving its cargo between Ecuador, Guatemala and Port Hueneme.
Chiquita also said in the third quarter of 2011 it implemented a new European shipping configuration that involves shipment of part of its core volume in container equipment on board third party containerships.
If Chiquita or other fruit companies increase their use of general container carriers to move bananas or other fruit rather than operate their own fleets or use breakbulk reefer ships, this could create a large, new market for North-South specialists like Hamburg Süd.